Coronation Research releases a new report ‘Equities for a superior return’. This report written by Guy Czartoryski and Adebayo Adebanjo challenges the widely-held opinions about Nigerian investments, especially views about the equity market.
“Nigerian listed equities, if properly selected, can deliver an adequate return to investors over the long term,” said Aigbovbioise AigImoukhuede, MD/CEO, Coronation Asset Management.
Nigerian Equities for beating inflation
As Nigerian investors face a third successive year of T-bill rates well below the rate of inflation, Coronation Research asks: “Which Nigerian investments beat inflation over the long term?” The surprising answer to this question is: “Equities!”
Coronation Research has studied equity returns during the period from 1st January 2016 until now. While the performance of the NGX All-Share Index was not strong, the performance of a selection of the most profitable NGX-listed companies has provided superior and inflation-beating returns.
Deep dive into equity returns
So, the return of the NGX All-Share Index from 1st January 2016 to 30th September 2021 was 40.50% or a compound annual growth rate (CAGR) of 6.15%, with gross dividends reinvested, that rose to a CAGR of 12.44%. But neither return would have beaten inflation over the same period which averaged 14.26% per annum.
However, a basket of 10 NGX-listed companies, each with a long-term and sustainable Return on Equity (RoE) of 20.5% or more, would have delivered an investment return with a CAGR of 16.36% from 1st January 2016 to 30th September 2021. With dividends reinvested, this would have risen to a compound annual growth rate of 24.71%.
This basket would have easily beaten inflation of 14.26%, giving a compound annual growth rate, in inflation-adjusted terms of 8.29%. And in US dollar-equivalent terms, the compound annual growth rate would have been 9.71%.
Meet Mr and Mrs Olufemi
In our report, we imagine a prosperous Nigerian household that, in January 2016, had one million Naira in savings to invest. Then, we follow what would have happened to their money if they had invested in either equities or Nigerian Treasury Bills (T-bills).
In the report, Coronation Research highlights the big difference between the performance of the NGX All-Share Index and the same return calculated when dividends are reinvested, the Total Return. Only with Total Returns can investors begin to make meaningful long-term gains.
The High RoE Portfolio
For a truly superior return, investors need to identify listed companies whose internal Return on Equity (RoE) is high – we stipulate a minimum of 20.5% per annum.
Furthermore, this return on equity needs to be sustainable. We found 10 NGX-listed stocks with these characteristics and created a hypothetical portfolio with these stocks in equal weight. Then we measured their total returns from 1st January 2016 onwards and came up with the surprising results given above.
To download the full report, visit www.coronationam.com
About Coronation Asset Management
Coronation Research is a division of Coronation Asset Management that offers full-fledged investment services across various asset classes to the entire spectrum of investors: major institutions, smaller niche institutions & corporates, public sector family offices, cooperatives and high net-worth individuals.
The Firm’s services include fund solutions (money market fund, fixed income fund and balanced fund), portfolio management (discretionary and non-discretionary), advisory services as well as fund administration and trustee services offered through its subsidiary, Coronation Trustees Limited.
In recognition of its product innovation and sound corporate governance practices, Coronation Asset Management was awarded the Fastest Growing Fund Management Company in Nigeria at the 2020 Global Banking & Finance Awards.